PPP Fraud Update: SBA Issues Fraud Landscape Report, Representative Introduces Legislation

Uncovering and prosecuting Paycheck Protection Program (PPP) fraud remains a top federal law enforcement priority midway through 2023. Due to the relatively relaxed rules put in place to facilitate the quick disbursement of loans under the program at the height of the COVID-19 pandemic, many businesses and individuals were able to obtain loans despite being ineligible to do so. IRS Criminal Investigation (IRS CI) and other federal agencies are targeting both successful and unsuccessful loan applicants, and targeted individuals are facing substantial fines and federal prison time in many cases.

SBA: At Least 17 Percent of All PPP and EIDL Loans Show Signs of Fraud

Recently, the U.S. Small Business Administration (SBA) issued a report titled, COVID-19 Pandemic EIDL and PPP Loan Fraud Landscape. The Economic Injury Disaster Loan (EIDL) program was another lesser-known pandemic relief program that provided non-forgivable loans to struggling businesses during the pandemic. In summarizing its findings, the SBA writes:

“We estimate that SBA disbursed over $200 billion in potentially fraudulent COVID-19 EIDLs, EIDL Targeted Advances, Supplemental Targeted Advances, and PPP loans. This means at least 17 percent of all COVID-19 EIDL and PPP funds were disbursed to potentially fraudulent actors.”

These are extraordinary numbers, and they have led to PPP fraud being labeled the “biggest fraud in a generation.” According to the SBA’s landscape report, it has identified more than 90,000 “actionable leads” since March 2020, and federal EIDL and PPP loan fraud investigations have resulted in more than 1,000 indictments, 800 arrests and 500 convictions. The report also indicates that the federal government’s enforcement efforts have resulted in more than $900 million in seized or forfeited assets and restitution orders—which, while a significant sum, pales in comparison to the total taxpayer losses resulting from EIDL and PPP loan fraud.

In its report, the SBA identifies 11 “fraud indicators,” which it describes as “almost like a fingerprint left behind at a crime scene.” While not necessarily indicative of fraud, it is clear that the SBA, IRS CI and other federal law enforcement agencies are focusing on these indicators when identifying potential targets and conducting EIDL and PPP loan fraud investigations:

• Hold Codes – EIDL and PPP loans were assigned hold codes by the SBA or third-party lenders if they identified “one or more potential indicators of fraud.”
• IP Addresses – The SBA has found that multiple EIDL and PPP loan applications submitted from the same IP address have shown a “higher likelihood of fraud.” The same is true for loan applications submitted from foreign IP addresses.
• Employer Identification Numbers (EINs) – Multiple EIDL and PPP loans submitted with matching EINs are red flags for fraud, as are EINs assigned to businesses established after the cutoff date to qualify under the EIDL program or the PPP.
• Bank Accounts – Fraud indicators related to loan applicants’ bank accounts include (i) multiple loan applications submitted with the same bank account; (ii) changing an applicant’s bank account information after the initial filing; and (iii) multiple loans being disbursed to the same bank account.
• Defaulted/No Loan Forgiveness – The SBA considers default under the EIDL and failure to apply for forgiveness under the PPP to also be indicators for fraud.
• Hotline Complaints – The SBA’s Office of Inspector General (OIG) has received numerous complaints of EIDL and PPP fraud, and federal authorities are following up on these complaints.
• Sole Proprietors/Independent Contractors Without EINs – Since EINs are required for all businesses with more than one employee, applicants claiming to have employees without submitting an EIN are facing scrutiny in many cases.
• Suspicious Phone Numbers – Similar to bank accounts, EINs and IP addresses, EIDL and PPP loan applications with matching phone numbers are also triggering scrutiny from the SBA and IRS CI.
• Suspicious Physical Addresses – Matching physical addresses on EIDL and PPP loan applications are also considered to be an indicator of fraud.
• COVID-19 EIDL Advances – The SBA has identified EIDL advances as an indicator of fraud as well.
• Suspicious Email Addresses – Along with matching email addresses on multiple loan applications, email addresses from “potentially temporary domains” or that are “essentially masked duplicates . . . [that] do not alter where the email is sent” are also considered to be indicators for EIDL and PPP loan fraud.

The SBA’s report states that hold codes, matching IP addresses and not applying for loan forgiveness are the three most common fraud indicators under the PPP—with each accounting for roughly $17 billion in fraudulent loans. In closing, the report states that SBA OIG “will continue to root out fraud, waste, and abuse and will continue to leverage and marshal the resources available across the federal law enforcement community to bring wrongdoers to justice.”

Representative Introduces PPP Shell Company Discovery Act (H.R. 1476)

In response to the high volume of fraud under the PPP, Representative William Timmons (R-SC) introduced the PPP Shell Company Discovery Act (H.R. 1476) in March of this year. With the stated goal of “catch[ing] PPP loan fraudsters, the legislation seeks to create a report of PPP loan recipients that had no tax withholdings in 2019 and that received loans at least four times their highest payroll amount during the 2018 calendar year. The bill is co-sponsored by representatives Lance Gooden and Pete Sessions from Texas and was most recently referred to the House’s Small Business Committee and Committee on Ways and Means.

Regardless of whether the PPP Shell Company Discovery Act passes, the SBA, IRS CI and other federal authorities have more than enough resources at their disposal to investigate and prosecute EIDL and PPP loan fraud. With federal authorities continuing to prioritize enforcement in this area in 2023 (and likely beyond) EIDL and PPP loan applicants and recipients must be prepared to affirmatively demonstrate compliance or defend against fraud allegations if necessary.

Contact Brown Tax, P.C.

Brown Tax, P.C. is a tax litigation and white-collar defense law firm that represents high-income and high-net-worth clients in high-stakes federal tax controversies. If you would like to speak with a lawyer at our firm about an EIDL or PPP loan, please call 888-870-0025 or request an appointment online today.